Even the most responsible borrowers can find themselves struggling to make payments on a loan. Whether you’re worried about missing your next payment or you’ve already received a default notice, there’s one question that’s probably on your mind: what happens when you default on a loan?
Loan default can seriously damage your credit score and your overall financial health. To protect yourself, you need to understand when your loan will enter default, what will happen afterwards, and what steps to take next.
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What does it mean to default on a loan?
Defaulting on a loan means violating the terms of your loan agreement, such as by failing to pay on time or make a certain number of full payments.
In most cases, your loan will enter default after you’ve missed several consecutive payments over a period of 3–9 months. The exact amount of time before a loan enters default varies according to the lender, the loan terms, and the type of loan.
Time Until Default on Different Types of Loans
| Loan type | Time to default |
|---|---|
| Personal (unsecured) loan | 30–90 days |
| Auto loan | 30+ days |
| Mortgage | 30 days |
| Credit card | 180 days |
| Federal student loan | 270 days |
| Private student loan | 90 days |
Data taken from Experian, StudentAid.gov, and the US Government Accountability Office. 1 2 3
Note that most loans have a grace period after you’ve missed a payment, which gives you time to catch up before you face penalties like late fees and late payments on your credit report. However, this grace period varies widely. It will usually be substantially shorter than the time it’ll take your loan to go into default.
What happens when you default on a loan
Allowing a loan to enter default demonstrates to lenders that you’re not a reliable borrower. This won’t just make it difficult to open new lines of credit in the future—it’ll also have several consequences for your life right now.
You may experience:
- Debt collection or repossession
- A drop in your credit score
- Serious financial strain
- Lawsuits
We’ll look at those in more detail.
Debt collection or repossession
If your loan stays in default for long enough, your lender may give up hope that you’ll ever repay it. If this happens, then they’ll pass your account over to debt collectors or repossession agents to cover their losses, depending on the type of loan you have:
- Secured loan: If you default on a loan backed by some form of collateral or asset (such as an auto loan or mortgage), your lender will likely repossess your collateral.
- Unsecured loan: On the other hand, if you default on a loan with no collateral (such as a student loan or unsecured personal loan), then your lender will charge off your debt and transfer or sell it to a debt collection agency. Debt collectors will then start going after you for payment.
Drop in your credit score
You usually won’t default on a loan until you’ve missed quite a few payments on it, which is bad news for your credit score.
Missed and late payments are incredibly damaging to your credit because they affect your payment history, which is the most important factor contributing to your credit score. The later the payment, the greater the drop in your credit score. 4
More severe negative marks like charge-offs, collection accounts, and repossessions (which we mentioned above) are even deadlier to your score.
Strain on your finances
Defaulting on a loan can increase your debt. When you’re behind on payments, any interest you haven’t paid off can compound on itself (i.e., your interest will start accruing interest), causing your debt to keep growing faster and faster. You may also need to pay late fees, collection costs, or even legal fees if you’re sued over the debt.
In some cases (such as with student loans), defaulting can also trigger a process known as loan acceleration, which is where your lender demands full payment for the remainder of your loan balance immediately. If you were struggling to keep up with payments in the first place, then you’ll find yourself in an even worse financial position when the entire loan comes due.
Lawsuits and other legal repercussions
Because defaulting on a loan means that you’ve stopped repaying your lender as agreed, your lender could take you to court to force you to pay. If you lose the lawsuit, the court may issue a judgment against you.
A judgment could give your lender or debt collectors the right to garnish your wages, freeze or garnish your bank accounts, or even seize your personal assets. 5
Additionally, even though judgments don’t currently appear on your credit reports, they can influence your eligibility for loans in the future since they’re public records that lenders are able to find. 6
Consequences of default for different loans
The table below shows the likely consequences of defaulting on different types of loans.
Potential Consequences of Default by Loan Type
| Loan type | Consequences of default |
|---|---|
| Auto loan | Car repossession |
| Mortgage | Home foreclosure |
| Personal or business loan | Asset seizure |
| Federal student loan | Wage garnishment, seizing of tax refunds |
| Private student loan | Collection attempts, possible lawsuits |
| Credit card | Possible lawsuit, wage garnishment |
How long will a loan default stay on my credit report?
Defaults can stay on your credit report for up to 7 years. So do all the other negative marks that can accompany them, such as late payments. If your debt is sent to collections, then you’ll also see a separate collection account appear on your credit report, and collections also stay on your credit report for 7 years, starting from the date of your first late payment.
The negative marks associated with the default will still stay on your report even if you bring your account current. However, the good news is that their negative impact on your credit score will diminish over time.
Can you get a default removed from your credit report?
You can sometimes get a default removed from your credit report. Your odds are much better if the default is an error (e.g., you actually paid on time and your lender mistakenly reported it, or they confused you with someone else and the loan was never yours in the first place).
Removing a legitimate default is possible, but it’s much harder.
How to remove a mistaken default from your credit report
If the default is an error, then you should dispute it by sending a dispute letter to your creditor and the credit bureaus reporting the default. They’ll have to prove the default is accurate or else delete it from your credit report.
You can create your dispute letter using the templates below:
How to remove a legitimate default from your credit report
Even if the default is real and not an error, you might be able to negotiate with your lender to remove it from your credit report, although it’s not particularly likely.
You can try the following approaches to get a default removed from your credit reports:
- Pay for delete: If you still have debts overdue, send a pay-for-delete letter to your creditor asking them to remove the default in exchange for payment.
- Goodwill deletion: If you’ve caught up on your payments, send a goodwill letter template asking your lender to remove the negative items associated with your default.
How to get out of loan default
The options you have for getting a loan out of default depend on the type of loan you have. Government-backed loans generally offer more options. For instance, there are several ways to get out of student loan default, such as student loan consolidation and loan rehabilitation.
If you’ve defaulted on another type of loan, then you probably only have the following options:
- Negotiating a new repayment plan: Your best option for getting out of default is to reach out to your lender directly and explain your situation. They may be willing to offer you alternative repayment options (like a longer repayment term with lower monthly payments).
- Credit counseling: A nonprofit credit counselor can go over all your options with you and give you advice that’s specific to your situation to help you get out of default. They may even be able to negotiate with your creditor on your behalf if you enroll in a debt management plan.
- Voluntary repossession: If you’ve defaulted on a secured loan like an auto loan, then you can voluntarily surrender your asset to get the loan out of default.
- Bankruptcy: In severe cases, you can consider declaring bankruptcy. However, bankruptcy has serious implications for your finances and credit, so it should be treated as a last resort after you’ve explored all your other options.
How to avoid defaulting on a loan
The best way to avoid defaulting on a loan is to contact your loan servicer as soon as possible once you realize you’re going to miss a payment. Ask about what options you have for forbearance (a temporary pause on payments) or modified loan terms.
You can also consider debt consolidation or refinancing if you’re having financial trouble. Set up autopay if you’re worried about simply forgetting to make payments.
However, in the end, showing your creditor that you’re serious about honoring your loan agreement and communicating with them when you’re in trouble is the best way to keep any loan in good standing.
